Over the past few years I have been to a number of meetings with representatives of the Bank of England and members of the Monetary Policy Committee. I have also been invited to attend other events where the Bank have spoken on the current economic situation.
The most recent of these was as at a lunch with the Deputy Governor, Charles Bean.
Whilst we were given a very thorough overview of the current global economy and the causes behind the financial problems in global markets, of greatest interest was an explanation of the two tools at the Bank’s disposal – managing interest rates & quantitive easing. Interest rates are easy to understand and, if you have a tracker mortgage, immediately beneficial. According to Wikipedia, the term quantitative easing describes “an extreme form of monetary policy used to stimulate an economy where interest rates are either at, or close to, zero.” The current rate is 0.5%.
In practical terms, the Bank of England has purchased financial assets, including treasuries and corporate bonds, from banks using money it has created. The creation of this new money is supposed to encourage lending by financial institutions and reducing the cost of borrowing, thereby stimulating the economy.
However, there is a risk that banks will hold onto their reserves. Apparently, the banks have more than 3x their normal level of reserves, but they are not lending out as much as we would like as these reserves have to be repaid within 3 years. From conversations that I have with local bankers, it appears that there is a local willingness to lend, but central decisions (or lack of clear direction from the centre) are impeding their local lending ability.
On the other side of the coin, I have met with a number of businesses who are struggling to raise finance or are having limits imposed on their existing borrowing.
The Bank of England is now thinking of ways to force greater lending and it is encouraging to see that, in domestic terms, repossessions are down. However, we must see greater lending to business from the Banks. That lack of lending will have a serious impact on the rate of recovery and, possibly of greater importance, the number of businesses that are still around when we come through this recession.
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